Cost Surge and China Slowdown to Further Weigh on Unicharm's Near-Term Profits

Narrow-moat Unicharm’s first-quarter results echo our key concerns, including 1) input cost surge significantly above the company’s guidance,2) limited profit growth driven by an improved product mix, and 3) slowdown in China’s feminine care growth. While management has maintained its full-year guidance, anticipating continued premiumization and partial price hikes, as well as favorable exchange rates, to offset high costs, we are skeptical that premiumization would last under a broad-based inflationary environment in which consumers’ disposable income has shrunk in most of its core markets. We have maintained our forecasts and fair value estimate of JPY 3,750, indicating 11% downside to our intrinsic value. We continue to view shares as overvalued but have acknowledged currency as an upside risk to our forecasts of which our 2022 core operating profit is 14% below the guidance.